Bank of England raises forecast for growth but risk of an interest rate rise recedes

In its quarterly inflation report the Bank indicated that it will be looking at figures for pay growth when making its decision on when interest rates should rise again after six years at a historic low of 0.5%.

The risk of a rise in interest rates before the end of the year appears to have receded after the Bank of England released its latest report on the state of the UK’s economy.

In its quarterly inflation report the Bank indicated that it will be looking at figures for pay growth when making its decision on when interest rates should rise again after six years at a historic low of 0.5%.

With the Bank slashing its prediction for wage growth from 2.5% to 1.25% this year, below the projected rate of inflation, the prospect of an interest rate increase in the short term has become less likely.

Quarterly pay data published shortly ahead of the report were even worse than the Bank had expected. The Bank’s predictions for the wider economy though were better, with UK growth figures upgraded from 3.4% to 3.5% for this year, and from 2.9% to 3% for next year.

Unemployment is expected to drop more quickly, falling below a rate of 6% this year, while inflation projections were little changed, hovering just below 2% over the next three years.

The Bank said the key measure of wasteful spare capacity or slack in the economy had narrowed slightly to around 1%, compared to a previous level of around 1.25%.

Slack is the measure that the monetary policy committee (MPC) has said it wants to see narrowed before there can be any rates hike, but there have been contradictory signals about this as real wages fall and jobs grow strongly.

Bank governor Mark Carney said: “In light of the heightened uncertainty about the current degree of slack, the committee will be placing particular importance on the prospective paths for wages and unit labour costs.”

Chris Williamson, chief economist at Markit, said: “There’s little new to be gleaned in relation to the timing of the first rate rise. The Report and recent rhetoric from policymakers gives the impression that rates will not rise until wage growth is showing clear signs of picking up.

“While it seems likely that calls to raise interest rates will start to gather strength in coming months, a majority vote for a rate rise still looks some way off.

“February therefore still looks the most likely month for the Bank to dip its toe into the water as far as tightening policy towards more normal levels is concerned, though November remains a possibility if the wages data pick up in coming months.

“There’s also very little to change the longer term outlook for interest rates, which the Carney stresses will remain below pre-crisis norms for a long time.”